ETF essentials · 2 minute read
ETFs, shares and traditional funds: what is the difference?
The short answer
A share is an ownership stake in one company. An ETF is a fund that usually holds many investments and trades on an exchange. A traditional investment fund also pools investors’ money, but it is normally bought or sold at a price calculated once each dealing day.
Why it matters
These investments may all appear on the same platform, but they work differently.
- Individual share: your return depends heavily on one company
- ETF: gives access to a portfolio and trades throughout the market day
- Traditional fund: gives access to a portfolio but normally deals at a daily fund price
An ETF can provide diversification more easily than a small collection of individual shares. However, diversification depends on what the ETF holds. A narrow technology ETF may still be concentrated.
Traditional funds may be actively managed or index-based. ETFs can also be passive or active, so “ETF” describes the structure rather than the investment strategy.
A simple example
Buying shares in one bank gives you exposure to that bank. Buying a European bank ETF could spread the investment across many banks. Buying a broad European equity fund could provide exposure to banks and several other sectors.
Each choice creates a different mix of risk, diversification, cost and trading flexibility.
What to check
- Are you buying one company or a portfolio?
- How diversified is the investment?
- When and at what price can it be traded?
- What fund, platform and dealing charges apply?
- Is the strategy active or index-based?
Key term explained
A pooled fund combines money from many investors and invests it according to a stated objective.
The structure matters, but the underlying investments remain the main driver of risk and return.